China has become an economic superpower and is now the world’s second-largest economy. It has its sights on the United States, which it could eclipse as the world’s largest economy between 2020 and 2030. Consider that the five most popular emerging markets funds have an average allocation of just 10.4% to the China market. An advisor who allocates 15% of his clients’ accounts to emerging markets leaves them with less than 1% invested in China. The need for a strategic approach to investing in this region is acute.
Over the past three decades, China’s economy has experienced robust growth as it shifts from a third-world country to a modern consumer economy and influential source of economic power. The view that China can be categorized within “emerging markets” no longer holds true, and a more accurate investment allocation to the Asian nation should be similar to those of other developed countries. In essence, China is no longer emerging, but rather, has emerged.
Incrementally, when investing in a broader emerging markets allocation, proper diversification must be ensured. The same principle holds true when investing in the Greater China region. The Greater China region is more complex in terms of equity share class structure.
By understanding the market dynamics of the region, it becomes clear that investing in Greater China requires approaching each market as its own asset class.
Under-Allocation of Assets
China’s population growth, consumption of commodity resources, urbanization and growth of equity capital markets are prominent trends. These factors will have significant implications on the future global benchmark re-weightings. In 2010, China was 9% of global GDP and represented 11% of global capitalization. These figures are estimated to rise to 17% and 20%, respectively, by 2020.
The impact of the changing global benchmarks presents an opportunity for advisors. Those who anticipate the macro impact of increased demand for securities—skating to where the puck will be instead of where it is—will be well-positioned to maximize results for their clients. Just as China has clearly graduated from emerging to emerged, a diversified portfolio should adjust its allocations accordingly to capitalize on the country’s continued momentum.